Let's Shake on It

1. A Cautionary Tale

Marvin Windows and Doors, in Minnesota, is a family-run enterprise that describes itself as the largest custom manufacturer of such products in the world. Despite its remarkable growth, the company has striven to maintain an air of informality and trust -- its website says, "At Marvin...a handshake is as good as a signature." Several years ago this policy was put to the test. Bill Marvin, then CEO, had a friend who was a sales representative for PPG (formerly Pittsburgh Plate Glass), with whom he did a lot of business. One weekend morning, in a front-lawn conversation, he agreed to buy quantities, some $2 million worth, of a PPG wood preservative product.

The handshake deal went through. But shortly thereafter, windows treated with the preservative began to rot. This was a major embarrassment, and the Marvin company made good on the windows to its customers (at a cost of tens of millions). Then it turned to PPG for help in covering the bill. PPG said, No thanks, that's your problem. Marvin sued PPG for fraud, among other things. With no written agreement binding the deal, a judge granted PPG a summary dismissal. PPG's lawyer, interviewed later, added insult to injury by pointing out that "experienced merchants should use contracts to outline who's responsible for what if the product they are buying doesn't work properly. Marvin didn't do that."

Marvin subsequently appealed, however, and was allowed to bring one count, breach of warranty, to trial. In 2002, a jury found in the company's favor and awarded $136 million in damages. Marvin has not yet seen any of the money, since PPG has appealed in turn.

Interested in the place of trust in business, I asked Bill Marvin's daughter, Susan, who currently serves as the company's president, about her own philosophy in the light of this long legal saga. "This experience with PPG has not changed the fundamental way in which we do business," she said. "We still believe that a person's character and integrity trumps any documents or contracts. The lesson we took away is that it's who you trust -- not if you trust."

This multimillion-dollar misunderstanding represents two fundamentally different ways of looking at business. You might call them "contractual" and "communal" -- the one enforced by the law, the other by conscience and personal relationship.

There's little doubt which one most of us prefer. We want to live in a world where you look people in the eye, give your word, "shake on it," and make good if something goes wrong. Small business is the bastion of the communal ethic, which thrives in tight-knit societies with ongoing relationships. The problem is that we sometimes suspect, with reason, that not everyone plays by the same rules.

2. These Are the Good Old Days

I remember the father of a friend of mine who came home from work one night and said: "The trouble with the world is that nobody wants to be honest for the sake of being honest anymore." I remember because he stood for everyone's father -- decent men who sometimes found a way to let us know that it was "a jungle out there," and always with the implication that people somehow used to be better. The moment that I describe happened decades ago. But it could have happened to someone else just yesterday.

It is the condition of nostalgia that a better world has always just passed by -- in this case, a world of honor. "Mazal and bracha," they say in New York City's Diamond District: luck and blessings. The incantation, with a handshake, closes a deal. Little stones and big sums of money traditionally change hands here on the basis of trust. But lately there's been a shift. The traders, drawn largely from the Orthodox Jewish community, now include outsiders, but mostly the problem is that not all the trading is face-to-face: The Internet has come into play. I spoke the other day to a second-generation trader named Allen Dubinsky who mourns the old days. "If you created a problem just once your name was mud," he said. "It doesn't work anymore. No sale is final until the check clears."

The Internet is just the latest interloper, with its eBay scammers and the vigilantes who chase them, and its identity-thieving phishers. All around us we seem to feel a loss of the communal sense of trust. If it's any comfort, this is a feeling we Americans have been experiencing for a long time -- in fact, virtually from the beginnings of the Republic.

3. A Short History of Sincerity in Business

In her excellent little book Confidence Men and Painted Women, Karen Halttunen takes us back to the watershed decade of the 1830s, when the country was going through as much social turmoil and dislocation as it ever has since. In the space of a generation we changed from an agrarian to a mercantile culture, from a stay-at-home society to one on the move. For many, appalled by the sudden change, it was as if the nation was reenacting Adam's fall from grace.

A representative figure of the time was the naive young man from the provinces: "The raw country youth entering the city to seek his fortune was coming to symbolize the American-on-the-make." His opposite number was the fellow out to fleece him, the confidence man, who represented all the perils and uncertainties of a fluid society, a world of strangers, a world of hypocrisy.

Halttunen draws much of her cultural data from the myriad advice books written by scores of literary preachers who tried to shore up the character of American youth. Be steady, hold to your principles. Be sincere. Only unshakable, transparent honesty could save you from the temptation of the con man. There was a rub, though. The perfectly open and honest fellow was the perfect mark.

By midcentury America had developed what the author calls "a cult of sincerity." A "premodern" sense of character (soul) was yielding to the modern meaning of character as personality. It was not enough to be honest -- what mattered was to develop those manners and that style that made you seem honest. Enter the clean shirt and the shoeshine, the firm handshake and the clear-eyed gaze. In short, one had to develop some of the wiles of the confidence man. One had to dabble in hypocrisy to demonstrate one's honesty. It is a spiritual problem from which we have not fully escaped.

We get sentimental over flinty integrity because we have all felt corruption's equined allure.

In a book just published, Freedom Just Around the Corner, the Pulitzer Prize-winning historian Walter A. McDougall gives the confidence man an even more central stage in our history. McDougall chronicles, indeed celebrates, the American people's "penchant for hustling." The various scoundrels of American business may be deplorable, but he argues that they are also perverse emblems of what has made us such a successful nation -- emblems, that is, of freedom and resourcefulness.

The New York Times reviewer of McDougall's book praised the historian's insight while noting that he failed to account for the genuine strain of idealism in American life. But it may be that our chicanery and our high-mindedness are but two sides of the same coin, curiously dependent on one another -- a tension built into our character. This is yet another one of the many ways in which we are riven as a culture, and all of us share to one degree or another in the conflict. We get sentimental over flinty integrity in part because we have all felt corruption's sequined allure.

Both these books may perhaps remind us of a humbler truth: There's a reason we have our laws and our contracts.

4. Your Word and the Law

"A verbal agreement isn't worth the paper it's written on," said the realist Sam Goldwyn. (He meant an oral agreement, but for some reason it's funnier his way.) Yet despite this famous dictum, federal law in fact gives some considerable standing to oral agreements.

Constance Bagley, a professor of business law at the Harvard Business School, explains that many oral agreements are "fully enforceable as binding contracts as long as all essential terms are agreed upon and there is intent to be bound." There are, as she notes, many significant exceptions. You can't be bound to a real estate transaction, a prenuptial agreement, or even a deal to buy a refrigerator without a contract. And then there is the question of witnesses and proof.

Still, this provision of the law has been actually used to powerful effect. In her book Managers and the Legal Environment, Professor Bagley discusses the landmark case in which Pennzoil sued Texaco, alleging interference in Pennzoil's deal to buy the Getty Oil Co. Texaco's defense argued in effect, "What deal?" No written contract had been executed between the two merging companies, only a four- or five-page memorandum recorded the basic terms, and that went unsigned. However, there had been a board meeting, a vote to approve the deal as amended by the memo in question, and there were handshakes all around. That was enough for the jury, which awarded Pennzoil $10.5 billion in damages. (The case was ultimately settled for about $3 billion.)

The prudent lesson, I suppose, is not that the law will always come to your rescue if someone welshes on a deal. The lesson is the flip side: That even without having signed anything, you may still have entered into an agreement.

There is an argument for learning to love contracts that has little to do with holding the other guy to his word. Richard Evans, a Massachusetts attorney specializing in real estate law, has a natural affinity for the contractual sense of life. But he points out that the best reason to draw up a contract is not in fact to protect yourself legally. He says, "It simply forces you to think through what you are doing." Besides, it may help you blink away the mists of sentimentality.

Not long ago I had occasion to recognize the wisdom of this advice, and to find out for myself the perils -- to both the heart and wallet -- of the handshake deal. The worst part of this tale is that I'm the villain.

5. Making (and Losing) Hay

The deal in question involves hay, and the short version of the story is that I sold a field out from under the guy who was mowing it. As you might expect, the long version offers some mitigating evidence, but it doesn't redeem me entirely.

Last fall I sold the small farm where my wife and I had lived for some years. A melancholy moment for me, and a reluctant decision, but a necessary one. We had gotten ourselves into a restoration project on another old place -- well, anyway, something had to give.

I had an informal deal with my neighbor -- let's call him Hamm -- that allowed him to hay the field without charge, to supplement the feed for his hobby herd of beef cattle. This was a good arrangement for both of us. He got the hay, and the field was kept open without any effort on my part. Now, Hamm is not one to do things halfway. He's a farmer by avocation but a heavy-equipment dealer by trade, and he likes to move machinery around. One day he said he'd like to make some improvements on the field -- and here, in retrospect, is where we might have gotten a few things down on paper. The next day a fleet of machines began to arrive, pulling up rocks, harrowing, applying an herbicide that turned the place into a brown wasteland, and then reseeding. This was more than I imagined he would do, and some of it (the herbicide) I disapproved of -- but now he was invested in my field.

Hamm knew that it was possible I'd sell the farm, but I think we each let ourselves indulge in a bit of wishful thinking. First of all, I was very reluctant to sell and he knew it, and we both thought it would never happen. Moreover, the place was too small and marginal ever to be a full-time farm, and the overwhelming likelihood was that any new owner would be happy to go on with our haying arrangement. Then along came the offer that couldn't be refused. As it turned out, the new buyer would be happy to let Hamm hay, but he intended to keep a few head of cattle himself and he wanted some of the hay. Not unreasonable, it seemed to me, but not what Hamm had in mind.

I presently got a bill for Hamm's expenses in "refurbishing" the field. It was $7,000. It included everything from limestone to repairs on the harrow he broke, with a substantial allowance for his labor. (On second thought, the labor charge may have been a good deal; Hamm is very successful, and if he had charged me what he really earns in an hour I would have been in worse trouble!)

Needless to say, we had a phone call, and I realized what was really troubling Hamm: that I had gotten too much for the place. I really think that if I'd been forced to sell at a loss Hamm would have forgotten all about the field. As it was, he was saying that he deserved some of the money.

I found this particular line of argument very easy to resist. But then Hamm sent a letter, and the letter took a different tack. He went over our understanding, not exactly as I recalled it, but his tone was reasonable. Toward the end he suggested, "let your conscience be your guide."

He had me. My conscience was uneasy. I did make a deal I couldn't deliver on. And that is how I came to spend $7,000 for work I didn't want done on a field I don't own.

And that is also how I learned the worst danger of the handshake deal. It is not that you'll be cheated but that you will cheat yourself, a more complicated and generally more unpleasant feeling. You will end up agreeing to something your lawyer wouldn't approve of and that no court would impose. The trouble is, most of us really do want to be the guy who can look at himself in the mirror, whose word is gold, who honors the deal no matter what it costs.